NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF MAJOR ACCOUNTING POLICIES
Basis of Presentation
. We have prepared these unaudited consolidated financial statements pursuant to instructions for quarterly reports on Form 10-Q, which we are required to file with the U.S. Securities and Exchange Commission (the "SEC"). These financial statements do not include all information and footnotes normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP"). These financial statements reflect all adjustments that we believe are necessary to present fairly our financial position as of
June 30, 2017
and our results of operations and cash flows for the periods presented. Except as otherwise disclosed herein, all such adjustments are of a normal and recurring nature. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in our annual report on Form 10-K for the year ended
December 31, 2016
. The results for interim periods are not necessarily indicative of annual results.
Principles of Consolidation.
The consolidated financial statements include the accounts of Oceaneering International, Inc. and our
50%
or more owned and controlled subsidiaries. We also consolidate entities that are determined to be variable interest entities if we determine that we are the primary beneficiary; otherwise, we account for those entities using the equity method of accounting. We use the equity method to account for our investments in unconsolidated affiliated companies of which we own an equity interest of between
20%
and
50%
and as to which we have significant influence, but not control, over operations. We use the cost method for all other long-term investments. Investments in entities that we do not consolidate are reflected on our balance sheet in Other non-current assets. All significant intercompany accounts and transactions have been eliminated.
Use of Estimates.
The preparation of financial statements in conformity with U.S. GAAP requires that our management make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates.
Reclassifications.
Certain amounts from prior periods have been reclassified to conform with the current period presentation.
Cash and Cash Equivalents.
Cash and cash equivalents include demand deposits and highly liquid investments with original maturities of three months or less from the date of investment.
Accounts Receivable – Allowances for Doubtful Accounts.
We determine the need for allowances for doubtful accounts using the specific identification method. We do not generally require collateral from our customers.
Inventory
. Inventory is valued at the lower of cost or net realizable value. We determine cost using the weighted-average method.
Property and Equipment and Long-Lived Intangible Assets.
We provide for depreciation of property and equipment on the straight-line method over their estimated useful lives. We charge the costs of repair and maintenance of property and equipment to operations as incurred, while we capitalize the costs of improvements that extend asset lives or functionality. Upon the disposition of property and equipment, the related cost and accumulated depreciation accounts are relieved and any resulting gain or loss is included as an adjustment to cost of services and products.
Intangible assets, primarily acquired in connection with business combinations, include trade names, intellectual property and customer relationships and are being amortized over their estimated useful lives.
We capitalize interest on assets where the construction period is anticipated to be more than three months. We capitalized
$1.2 million
and
$0.9 million
of interest in the
three-month periods ended
June 30, 2017
and
2016
, respectively, and
$2.2 million
and
$1.8 million
in the
six-month periods ended
June 30, 2017
and
2016
, respectively. We do not allocate general administrative costs to capital projects.
Our management periodically, and upon the occurrence of a triggering event, reviews the realizability of our property and equipment and long-lived intangible assets to determine whether any events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. For long-lived assets to be held and used, we base our evaluation on impairment indicators such as the nature of the assets, the future economic benefits of the assets, any historical or future profitability measurements and other external market
conditions or factors that may be present. If such impairment indicators are present or other factors exist that indicate that the carrying amount of an asset may not be recoverable, we determine whether an impairment has occurred through the use of an undiscounted cash flows analysis of the asset at the lowest level for which identifiable cash flows exist. If an impairment has occurred, we recognize a loss for the difference between the carrying amount and the fair value of the asset. For assets held for sale or disposal, the fair value of the asset is measured using fair market value less estimated costs to sell. Assets are classified as held-for-sale when we have a plan for disposal of certain assets and those assets meet the held for sale criteria.
Business Acquisitions
. We account for business combinations using the acquisition method of accounting, and, in each case, we allocate the acquisition price to the assets acquired and liabilities assumed based on their fair market values at the date of acquisition.
Goodwill.
Under existing GAAP at December 31, 2016, in our annual evaluation of goodwill for impairment, we first assessed qualitative factors to determine whether the existence of events or circumstances led to a determination that it was more likely than not that the fair value of a reporting unit was less than its carrying amount. If, after assessing the totality of events or circumstances, we determined it was more likely than not that the fair value of a reporting unit was less than its carrying amount, we were required to perform the first step of the two-step impairment test. We tested the goodwill attributable to each of our reporting units for impairment as of
December 31, 2016
and concluded that there was no impairment. In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-04
"Intangibles – Goodwill and Other (Topic 350) Simplifying the Test for Goodwill Impairment."
This update simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Under the amendments in this update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. However, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The amendments in this update are effective beginning January 1, 2020. Early adoption is permitted for testing dates after January 1, 2017, and the update is to be applied on a prospective basis. We adopted this update effective January 1, 2017.
In addition to our annual evaluation of goodwill for impairment, upon the occurrence of a triggering event, we review our goodwill to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount.
Foreign Currency Translation.
The functional currency for several of our foreign subsidiaries is the applicable local currency. Results of operations for foreign subsidiaries with functional currencies other than the U.S. dollar are translated into U.S. dollars using average exchange rates during the period. Assets and liabilities of these foreign subsidiaries are translated into U.S. dollars using the exchange rates in effect at the balance sheet date, and the resulting translation adjustments are recognized, net of tax, in accumulated other comprehensive income as a component of shareholders' equity. All foreign currency transaction gains and losses are recognized currently in the Consolidated Statements of Operations.
New Accounting Standards.
In May 2014, the FASB issued ASU 2014-09, "
Revenue from Contracts with Customers
." ASU 2014-09, as amended, completes the joint effort by the FASB and International Accounting Standards Board to improve financial reporting by creating common revenue recognition guidance for U.S. GAAP and International Financial Reporting Standards. ASU 2014-09 applies to all companies that enter into contracts with customers to transfer goods or services. ASU 2014-09 is effective for us for interim and annual reporting periods beginning after December 15, 2017. Early application is not permitted before periods beginning after December 15, 2016, and we have elected to apply ASU 2014-09 by recognizing the cumulative effect of applying ASU 2014-09 at the date of initial application and not adjusting comparative information.
We have formed a project team to implement this standard, and our project team has performed an initial assessment of our revenue streams, has completed its preliminary assessment of our contract population relevant to the standard, and has analyzed the impacts that ASU 2014-09 may have on our business. We believe that our project plan will enable us to complete all of the required work to assess our revenue position, create the necessary
policies, procedures and controls and calculate the cumulative effect of applying ASU 2014-09 at the date of initial application, in line with the timeline and requirements of the standard.
At this time, we have identified the following areas of our business that we expect to see some effects from the application of ASU 2014-09. We anticipate that elements of our product-related revenue and margins will be accelerated as a result of the standard's treatment of contracts meeting the requirements of over-time recognition as compared to revenues recognized upon delivery currently. Additionally, ASU 2014-09 requires revenue recognition related to uninstalled materials if certain criteria are met. We expect that contracts within our Subsea Products segment will meet this criteria, and, as a result, we expect more variability in gross margin percentages on a period-to-period basis. We do not expect the changes to be significant in the context of our overall results for 2018, and we are evaluating the projected adjustment to be recorded to retained earnings at the start of the transition period and the required disclosures.
In January 2016, the FASB issued ASU 2016-01,
"Financial Instruments — Overall (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities."
This update:
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requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value, with changes in fair value recognized in net income;
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simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment — when a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value;
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eliminates the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet;
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requires entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes;
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requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments;
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requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and
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clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets.
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ASU 2016-01 will be effective for us beginning on January 1, 2018. We are currently assessing the impact of the requirements of ASU 2016-01 on our consolidated financial statements and future disclosures.
In February 2016, the FASB issued ASU No. 2016-02,
"Leases."
This update requires reporting entities to separate the lease components from the non-lease components in a contract and recognize lease assets and lease liabilities on the balance sheet for substantially all lease arrangements. ASU No. 2016-02 is effective for us beginning January 1, 2019. We are currently evaluating the requirements of ASU 2016-02 and have not yet determined its impact on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09,
"Compensation – Stock Compensation – Improvements to Employee Share-Based Payment Accounting."
This update simplifies several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and the classification on the statement of cash flows. In addition, the update allows an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. The element of the update that will have the most impact on our financial statements will be income tax consequences. See Note 6 -"Income Taxes" - for the effect this update has had on our income taxes in 2017. Excess tax benefits and tax deficiencies on share-based compensation awards are now included in our tax provision within our condensed consolidated statement of operations as discrete items in the reporting period in which they occur, rather than (as was the previous accounting treatment) recording in additional paid-in capital on our condensed consolidated balance sheets. We have also elected to continue our current policy of estimating forfeitures of share-based compensation awards at the time of grant and revising in subsequent periods to reflect actual forfeitures. In our consolidated statement of cash flows for the
six-month period ended
June 30, 2016
, we have reclassified two items to conform with the presentation specified under ASU 2016-09: (1) we have
reclassified the effect related to the tax deficiency associated with share-based compensation from financing activities to operating activities; and (2) we have reclassified the amounts related to withholding tax payments from operating activities to financing activities. Other than these two cash flow items applied retrospectively, we have implemented ASU 2016-09 prospectively beginning January 1, 2017.
In October 2016, the FASB issued ASU 2016-16,
"Income Taxes (Topic 740) – Intra-Entity Transfers of Assets Other than Inventory."
Current U.S. GAAP generally prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. The amendments in this update will eliminate the exception for an intra-entity transfer of an asset other than inventory. Two common examples of assets included within the scope of this update are intellectual property and property, plant, and equipment. The exception for an intra-entity transfer of inventory will remain in place. The amendments in this update are effective for us beginning January 1, 2018. We do not anticipate that this update will have a material effect on our consolidated financial statements.
2. INVENTORY
The following is information regarding our inventory:
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(in thousands)
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Jun 30, 2017
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Dec 31, 2016
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Inventory, net:
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Remotely operated vehicle parts and components
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$
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117,168
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$
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118,236
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Other inventory, primarily raw materials
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149,468
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161,894
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Total
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$
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266,636
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$
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280,130
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3. DEBT
Long-term Debt consisted of the following:
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(in thousands)
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Jun 30, 2017
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Dec 31, 2016
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4.650% Senior Notes due 2024:
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Principal amount of the notes
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$
|
500,000
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$
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500,000
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Issuance costs, net of amortization
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(5,042
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)
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(5,385
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)
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Fair value of interest rate swaps on $200 million of principal
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(859
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)
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(1,557
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)
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Term Loan Facility
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300,000
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300,000
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Revolving Credit Facility
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—
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—
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Long-term Debt
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$
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794,099
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$
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793,058
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In November 2014, we completed the public offering of
$500 million
aggregate principal amount of
4.650%
Senior Notes due 2024 (the "Senior Notes"). We pay interest on the Senior Notes on May 15 and November 15 of each year. The Senior Notes are scheduled to mature on November 15, 2024. We may redeem some or all of the Senior Notes prior to maturity at specified redemption prices. We used the net proceeds from the offering for general corporate purposes, including funding an acquisition, other capital expenditures and repurchases of shares of our common stock.
In October 2014, we entered into a new credit agreement (as amended, the "Credit Agreement") with a group of banks to replace our prior principal credit agreement. The Credit Agreement provides for a
$300 million
three-year term loan (the "Term Loan Facility") and a
$500 million
five-year revolving credit facility (the "Revolving Credit Facility"). Subject to certain conditions, the aggregate commitments under the Revolving Credit Facility may be increased by up to
$300 million
at any time upon agreement between us and existing or additional lenders. Borrowings under the Revolving Credit Facility and the Term Loan Facility may be used for general corporate purposes. Simultaneously with the execution of the Credit Agreement and pursuant to its terms, we repaid all amounts outstanding under, and terminated, our prior principal credit agreement.
In November 2015, we entered into Agreement and Amendment No. 1 to Credit Agreement ("Amendment No. 1"). Amendment No. 1 amended the Credit Agreement to (1) replace the maximum leverage ratio financial covenant with a new financial covenant restricting the maximum total capitalization ratio (defined in Amendment No. 1 to be the ratio of consolidated debt to total capitalization) to 55% and (2) extend the maturities of the Term Loan Facility and the Revolving Credit Facility by one year each, which maturity terms have since been superseded by amendment, as described below.
In November 2016, we entered into Agreement and Amendment No. 2 to Credit Agreement ("Amendment No. 2"). Amendment No. 2 amended the Credit Agreement to, among other things, extend the maturities of the Term Loan Facility and the Revolving Credit Facility to October 25, 2019 and October 25, 2021, respectively, with the extending Lenders, which represent 90% of the existing commitments of the Lenders, such that (a) the total commitments for the Revolving Credit Facility will be $500 million until October 25, 2020 and thereafter $450 million until October 25, 2021, and (b) the outstanding term loan advances pursuant to the Term Loan Facility will be $300 million until October 27, 2018 and thereafter $270 million until October 25, 2019. The total commitments for the Revolving Credit Facility and the outstanding term loan advances pursuant to the Term Loan Facility have since been superseded by amendment, as described below.
In June 2017, we entered into Agreement and Amendment No. 3 to Credit Agreement ("Amendment No. 3"). Amendment No. 3 amended the Credit Agreement such that (1) the total commitments for the Revolving Credit Facility are $500 million until October 25, 2021 and (2) the outstanding term loan maturities pursuant to the Term Loan Facility are $300 million until October 25, 2019.
Borrowings under the Credit Agreement bear interest at an Adjusted Base Rate or the Eurodollar Rate (both as defined in the Credit Agreement), at our option, plus an applicable margin based on our Leverage Ratio (as defined in the Credit Agreement) and, at our election, based on the ratings of our senior unsecured debt by designated ratings services, thereafter to be based on such debt ratings. The applicable margin varies: (1) in the case of advances bearing interest at the Adjusted Base Rate, from
0.125%
to
0.750%
for borrowings under the Revolving Credit Facility and from
0%
to
0.500%
for borrowings under the Term Loan Facility; and (2) in the case of advances bearing interest at the Eurodollar Rate, from
1.125%
to
1.750%
for borrowings under the Revolving Credit Facility
and from
1.000%
to
1.500%
for borrowings under the Term Loan Facility. The Adjusted Base Rate is the highest of (1) the per annum rate established by the administrative agent as its prime rate, (2) the federal funds rate plus
0.50%
and (3) the daily one-month LIBOR plus
1%
. We pay a commitment fee ranging from
0.125%
to
0.300%
on the unused portion of the Revolving Credit Facility, depending on our Leverage Ratio. The commitment fees are included as interest expense in our consolidated financial statements.
The Credit Agreement contains various covenants that we believe are customary for agreements of this nature, including, but not limited to, restrictions on our ability and the ability of each of our subsidiaries to incur debt, grant liens, make certain investments, make distributions, merge or consolidate, sell assets, enter into transactions with affiliates and enter into certain restrictive agreements. We are also subject to a maximum total capitalization ratio of 55%, as noted above. The Credit Agreement includes customary events of default and associated remedies. As of
June 30, 2017
, we were in compliance with all the covenants set forth in the Credit Agreement.
We incurred
$6.9 million
of issuance costs related to the Senior Notes and
$2.2 million
of new loan costs, including costs of the Amendments, related to the Credit Agreement. We are amortizing these costs, which are included on our balance sheet, net of accumulated amortization, as a reduction of debt for the Senior Notes and as an other non-current asset for the Credit Agreement, to interest expense over ten years for the Senior Notes and over six years for the Credit Agreement. Please refer to Note 4 - "Commitments and Contingencies" - for more information on our interest rate swaps.
4. COMMITMENTS AND CONTINGENCIES
Litigation.
On June 17, 2014, Peter L. Jacobs, a purported shareholder, filed a derivative complaint against all of the then current members of our board of directors and one of our former directors, as defendants, and our company, as nominal defendant, in the Court of Chancery of the State of Delaware. Through the complaint, the plaintiff is asserting, on behalf of our company, actions for breach of fiduciary duties and unjust enrichment in connection with prior determinations of our board of directors relating to nonexecutive director compensation. The plaintiff is seeking relief including disgorgement of payments made to the defendants, an award of unspecified damages and an award for attorneys’ fees and other costs. We and the defendants filed a motion to dismiss the complaint and a supporting brief on which the Court has not yet ruled. In any event, our company is only a nominal defendant in this litigation, and we do not expect the resolution of this matter to have a material adverse effect on our results of operations, cash flows or financial position.
In the ordinary course of business, we are subject to actions for damages alleging personal injury under the general maritime laws of the United States, including the Jones Act, for alleged negligence. We report actions for personal injury to our insurance carriers and believe that the settlement or disposition of those claims will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Various other actions and claims are pending against us, most of which are covered by insurance. Although we cannot predict the ultimate outcome of these matters, we believe that our ultimate liability, if any, that may result from these other actions and claims will not materially affect our results of operations, cash flows or financial position.
Financial Instruments and Risk Concentration.
In the normal course of business, we manage risks associated with foreign exchange rates and interest rates through a variety of strategies, including the use of hedging transactions. As a matter of policy, we do not use derivative instruments unless we have an underlying exposure. Other financial instruments that potentially subject us to concentrations of credit risk are principally cash and cash equivalents and accounts receivable.
The carrying values of cash and cash equivalents approximate their fair values due to the short-term maturity of the underlying instruments. Accounts receivable are generated from a broad group of customers, primarily from within the energy industry, which is our major source of revenue. Due to their short-term nature, carrying values of our accounts receivable and accounts payable approximate fair market values. We had borrowings of
$300 million
as of
June 30, 2017
under our Term Loan Facility. Due to the short-term nature of the associated interest rate periods, the carrying value of our debt under the Term Loan Facility approximates its fair value. The fair value of this debt is classified as Level 2 in the fair value hierarchy under U.S. GAAP (inputs other than quoted prices in active markets
for similar assets and liabilities that are observable or can be corroborated by observable market data for substantially the full term for the assets or liabilities).
We estimated the fair market value of the Senior Notes to be
$492 million
as of
June 30, 2017
, based on quoted prices. Since the market for the Senior Notes is not an active market, the fair value of the Senior Notes is classified within Level 2 in the fair value hierarchy under U.S. GAAP.
We have two interest rate swaps in place on a total of
$200 million
of the Senior Notes for the period to November 2024. The agreements swap the fixed interest rate of 4.650% on $100 million of the Senior Notes to the floating rate of one month LIBOR plus 2.426% and one month LIBOR plus 2.823% on another $100 million. We estimate the combined fair value of the interest rate swaps to be a net liability of
$0.9 million
as of
June 30, 2017
, with
$1.7 million
included on our balance sheet in our other long-term liabilities, and
$0.8 million
included in non-current assets. These values were arrived at using a discounted cash flow model using Level 2 inputs.
Since the second quarter of 2015, the exchange rate for the Angolan kwanza relative to the U.S. dollar generally has been declining, although the exchange rate was relatively stable during the
six-month period ended
June 30, 2017
. As our functional currency in Angola is the U.S. dollar, we recorded foreign currency transaction losses related to the kwanza of
$1.2 million
and
$8.2 million
in the three- and
six-month periods ended
June 30, 2016
, respectively, as a component of
Other expense, net
in our Consolidated Statements of Operations for those respective periods. Our foreign currency transaction losses related primarily to the remeasurement of our Angolan kwanza cash balances to U.S. dollars. Conversion of cash balances from kwanza to U.S. dollars is controlled by the central bank in Angola, and the central bank has slowed this process since mid-2015, causing our kwanza cash balances to subsequently increase. As of
June 30, 2017
, we had the equivalent of approximately
$34 million
of kwanza cash balances in Angola reflected on our balance sheet.
To mitigate our currency exposure risk in Angola, through
June 30, 2017
we used kwanza to purchase
$59 million
equivalent Angolan central bank (Banco Nacional de Angola) bonds with various maturities throughout 2018. These bonds are denominated as U.S. dollar equivalents, so that, upon payment of semi-annual interest and principal upon maturity, payment is made in kwanza, equivalent to the respective U.S. dollars at the then-current exchange rate. We have classified these instruments as held-to-maturity, and have recorded the original cost on our balance sheet as other non-current assets. We estimated the fair market value of the Angolan bonds to be
$57 million
at
June 30, 2017
using quoted prices. Since the market for the Angolan bonds is not an active market, the fair value of the Angolan bonds is classified within Level 2 in the fair value hierarchy under U.S. GAAP.
5. EARNINGS PER SHARE, SHARE-BASED COMPENSATION AND SHARE REPURCHASE PLAN
Earnings per Share.
For each period presented, the only difference between our calculated weighted average basic and diluted number of shares outstanding is the effect of outstanding restricted stock units. In periods where we have a net loss, the effect of our outstanding restricted stock units is anti-dilutive, and therefore does not increase our diluted shares outstanding.
For each period presented, our net income (loss) allocable to both common shareholders and diluted common shareholders is the same as our net income (loss) in our consolidated statements of operations.
Dividends.
From the second quarter of 2014 through the third quarter of 2016, we paid a quarterly dividend to our common shareholders of
$0.27
per share. Starting in the fourth quarter of 2016, we have been paying a dividend of
$0.15
per share. Our latest quarterly dividend is
$0.15
per share and was declared in July 2017 and is payable in September 2017.
Share-Based Compensation.
We have no outstanding stock options and, therefore, no share-based compensation to be recognized pursuant to stock option grants.
During 2017, 2016 and 2015, we granted restricted units of our common stock to certain of our key executives and employees. During 2017 and 2016, our Board of Directors granted restricted common stock to our nonemployee directors. During 2015, our Board of Directors granted restricted units of our common stock to our Chairman and restricted common stock to our other nonemployee directors. The restricted units granted to our key executives and key employees generally vest in full on the third anniversary of the award date, conditional on continued employment. The restricted stock unit grants, including those granted to our Chairman, can vest pro rata over three
years, provided the individual meets certain age and years-of-service requirements. The shares of restricted common stock we grant to our non-employee directors vest in full on the first anniversary of the award date, conditional upon continued service as a director. Each grantee of shares of restricted stock is deemed to be the record owner of those shares during the restriction period, with the right to vote and receive any dividends on those shares. The restricted stock units outstanding have no voting or dividend rights.
For each of the restricted stock units granted in
2015
through
2017
, at the earlier of three years after grant or at termination of employment or service, the grantee will be issued one share of our common stock for each unit vested. As of
June 30, 2017
and
December 31, 2016
, respective totals of
1,259,039
and
1,052,007
shares of restricted stock or restricted stock units were outstanding.
We estimate that share-based compensation cost not yet recognized related to shares of restricted stock or restricted stock units, based on their grant-date fair values, was
$18 million
at
June 30, 2017
. This expense is being recognized on a staged-vesting basis over three years for awards attributable to individuals meeting certain age and years-of-service requirements, and on a straight-line basis over the applicable vesting period of one or three years for the other awards.
Share Repurchase Plan.
In December 2014, our Board of Directors approved a plan to repurchase up to
10 million
shares of our common stock. Under this plan, we had repurchased
2.0 million
shares of our common stock for
$100 million
through
December 31, 2016
. We did not repurchase any shares under the plan during the
six-month period ended
June 30, 2017
. We account for the shares we hold in treasury under the cost method, at average cost.
6. INCOME TAXES
During interim periods, we provide for income taxes based on our current estimated annual effective tax rate using assumptions as to (1) earnings and other factors that would affect the tax provision for the remainder of the year and (2) the operations of foreign branches and subsidiaries that are subject to local income and withholding taxes. In the
six-month period ended
June 30, 2017
, we recognized additional tax expense of
$1.2 million
from discrete items. The primary discrete tax expense item was
$2.9 million
as a result of our implementation of ASU 2016-09,
"Compensation – Stock Compensation – Improvements to Employee Share-Based Payment Accounting."
Excess tax benefits and tax deficiencies on share-based compensation awards are now included in our tax provision within our condensed consolidated statement of operations as discrete items in the reporting period in which they occur, rather than (as was the previous accounting treatment) recording in additional paid-in capital on our condensed consolidated balance sheets. See Note 1 for further discussion of ASU 2016-09. The effective tax rate, before discrete items, of
20.4%
for the
six months ended
June 30, 2017
was less beneficial than the federal statutory rate of
35.0%
, primarily due to non-deductible expenses partially offset by our intention to continue to indefinitely reinvest in certain of our international operations. We do not believe that this effective rate is meaningful, as the rate is less significant at a low pretax income or a pretax loss position. The effective tax rate, before discrete items, of
31.3%
for the
six months
ended
June 30, 2016
was lower than the federal statutory rate of
35.0%
, primarily due to our intention to indefinitely reinvest in certain of our international operations. We do not provide for U.S. taxes on the portion of our foreign earnings we indefinitely reinvest.
We conduct our international operations in a number of locations that have varying laws and regulations with regard to income and other taxes, some of which are subject to interpretation. We recognize the benefit for a tax position if the benefit is more likely than not to be sustainable upon audit by the applicable taxing authority. If this threshold is met, the tax benefit is then measured and recognized at the largest amount that we believe is greater than
50%
likely of being realized upon ultimate settlement. We do not believe that the total of unrecognized tax benefits will significantly increase or decrease in the next 12 months.
We account for any applicable interest and penalties on uncertain tax positions as a component of our provision for income taxes on our financial statements. Including associated foreign tax credits and penalties and interest, we have accrued a net total of
$5.2 million
in Other Long-term Liabilities on our balance sheet for unrecognized tax benefits as of
June 30, 2017
. All additions or reductions to those liabilities would affect our effective income tax rate in the periods of change.
Our tax returns are subject to audit by taxing authorities in multiple jurisdictions. These audits often take years to complete and settle. The following lists the earliest tax years open to examination by tax authorities where we have significant operations:
|
|
|
|
|
|
|
Jurisdiction
|
|
Periods
|
United States
|
|
2013
|
United Kingdom
|
|
2013
|
Norway
|
|
2007
|
Angola
|
|
2013
|
Brazil
|
|
2011
|
Australia
|
|
2012
|
7. BUSINESS SEGMENT INFORMATION
We are a global oilfield provider of engineered services and products, primarily to the offshore oil and gas industry, with a focus on deepwater applications. Through the use of our applied technology expertise, we also serve the defense, aerospace and commercial theme park industries. Our Oilfield business consists of Remotely Operated Vehicles ("ROVs"), Subsea Products, Subsea Projects and Asset Integrity. Our ROV segment provides submersible vehicles operated from the surface to support offshore oil and gas exploration, development, production and decommissioning activities. Our Subsea Products segment supplies a variety of specialty subsea hardware and related services. To improve operational efficiency, we have reorganized our Subsea Products segment into two business units: (1) manufactured products; and (2) service and rental. Manufactured products include production control umbilicals and specialty subsea hardware, while service and rental includes tooling, subsea work systems and installation and workover control systems. This internal reorganization did not affect our segment reporting structure or the historical comparability of our segment results. Our Subsea Projects segment provides
multiservice subsea support
vessels and oilfield diving and support vessel operations, primarily for inspection, maintenance and repair and installation activities. Since April 2015, we have also provided survey, autonomous underwater vehicle ("AUV") and satellite-positioning services. Our Asset Integrity segment provides asset integrity management and assessment services and nondestructive testing and inspection. Our Advanced Technologies business provides project management, engineering services and equipment for applications in non-oilfield markets. Unallocated Expenses are those not associated with a specific business segment. These consist of expenses related to our incentive and deferred compensation plans, including restricted stock and bonuses, as well as other general expenses, including corporate administrative expenses.
There are no differences in the basis of segmentation or in the basis of measurement of segment profit or loss from those used in our consolidated financial statements for the year ended
December 31, 2016
.
The table that follows presents Revenue, Income (Loss) from Operations and Depreciation and Amortization by business segment for each of the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
(in thousands)
|
|
Jun 30, 2017
|
|
Jun 30, 2016
|
|
Mar 31, 2017
|
|
Jun 30, 2017
|
|
Jun 30, 2016
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
Oilfield
|
|
|
|
|
|
|
|
|
|
|
Remotely Operated Vehicles
|
|
$
|
103,432
|
|
|
$
|
139,641
|
|
|
$
|
94,022
|
|
|
$
|
197,454
|
|
|
$
|
287,262
|
|
Subsea Products
|
|
174,893
|
|
|
190,897
|
|
|
150,639
|
|
|
325,532
|
|
|
385,709
|
|
Subsea Projects
|
|
75,545
|
|
|
138,662
|
|
|
62,956
|
|
|
138,501
|
|
|
268,084
|
|
Asset Integrity
|
|
58,192
|
|
|
73,864
|
|
|
52,658
|
|
|
110,850
|
|
|
143,464
|
|
Total Oilfield
|
|
412,062
|
|
|
543,064
|
|
|
360,275
|
|
|
772,337
|
|
|
1,084,519
|
|
Advanced Technologies
|
|
102,974
|
|
|
82,475
|
|
|
85,901
|
|
|
188,875
|
|
|
149,364
|
|
Total
|
|
$
|
515,036
|
|
|
$
|
625,539
|
|
|
$
|
446,176
|
|
|
$
|
961,212
|
|
|
$
|
1,233,883
|
|
Income (Loss) from Operations
|
|
|
|
|
|
|
|
|
|
|
Oilfield
|
|
|
|
|
|
|
|
|
|
|
Remotely Operated Vehicles
|
|
$
|
10,376
|
|
|
$
|
18,020
|
|
|
$
|
5,925
|
|
|
$
|
16,301
|
|
|
$
|
45,007
|
|
Subsea Products
|
|
10,552
|
|
|
25,121
|
|
|
11,483
|
|
|
22,035
|
|
|
65,761
|
|
Subsea Projects
|
|
3,000
|
|
|
10,237
|
|
|
187
|
|
|
3,187
|
|
|
17,026
|
|
Asset Integrity
|
|
3,755
|
|
|
(805
|
)
|
|
2,267
|
|
|
6,022
|
|
|
(371
|
)
|
Total Oilfield
|
|
27,683
|
|
|
52,573
|
|
|
19,862
|
|
|
47,545
|
|
|
127,423
|
|
Advanced Technologies
|
|
7,632
|
|
|
5,528
|
|
|
5,026
|
|
|
12,658
|
|
|
6,121
|
|
Unallocated Expenses
|
|
(25,925
|
)
|
|
(19,721
|
)
|
|
(25,038
|
)
|
|
(50,963
|
)
|
|
(47,065
|
)
|
Total
|
|
$
|
9,390
|
|
|
$
|
38,380
|
|
|
$
|
(150
|
)
|
|
$
|
9,240
|
|
|
$
|
86,479
|
|
Depreciation and Amortization
|
|
|
|
|
|
|
|
|
|
|
Oilfield
|
|
|
|
|
|
|
|
|
|
|
Remotely Operated Vehicles
|
|
$
|
29,036
|
|
|
$
|
34,026
|
|
|
$
|
29,229
|
|
|
$
|
58,265
|
|
|
$
|
67,710
|
|
Subsea Products
|
|
12,785
|
|
|
12,952
|
|
|
12,999
|
|
|
25,784
|
|
|
25,759
|
|
Subsea Projects
|
|
7,781
|
|
|
8,353
|
|
|
8,080
|
|
|
15,861
|
|
|
16,872
|
|
Asset Integrity
|
|
1,780
|
|
|
2,843
|
|
|
1,460
|
|
|
3,240
|
|
|
5,756
|
|
Total Oilfield
|
|
51,382
|
|
|
58,174
|
|
|
51,768
|
|
|
103,150
|
|
|
116,097
|
|
Advanced Technologies
|
|
784
|
|
|
806
|
|
|
797
|
|
|
1,581
|
|
|
1,540
|
|
Unallocated Expenses
|
|
1,138
|
|
|
999
|
|
|
1,098
|
|
|
2,236
|
|
|
2,123
|
|
Total
|
|
$
|
53,304
|
|
|
$
|
59,979
|
|
|
$
|
53,663
|
|
|
$
|
106,967
|
|
|
$
|
119,760
|
|
We determine income (loss) from operations for each business segment before interest income or expense, other income (expense) and provision for income taxes. We do not consider an allocation of these items to be practical. Our equity in earnings (losses) of unconsolidated affiliates is part of our Subsea Projects segment.